The announcement yesterday that the Reserve Bank has lowered the Official Cash Rate to 1.0% reinforces what is obvious to many people – the economy is stalling. But how much of this stalling is a result of New Zealand economic policy as opposed to the rather gloomy international economic environment we find ourselves in?
As has been made clear in the past, there is not a lot that we can do about the following conditions, all of which are impacting on the global environment at the moment:
- United States vs China trade war, which has seen hundreds of billions of dollars slapped on each others products as well as an increasingly bitter war of words about how China and the U.S. conduct themselves
- The Brexit deadline – which Boris Johnson insists will not be extended again, but which is likely to make for a brutal landing on 01 November 2019
- The likely impact on the E.U. should Britain’s exit from the Union be a hard one
- Tensions in the Persian Gulf and the tanker tit-for-tat seizures going on between Iran, the United States and Britain which are driving up oil prices both in New Zealand and abroad
- Continued sluggish European economic growth, which has not significantly changed in several years
The trade war going on between the United States and China is causing significant turbulence in the financial markets. The other day the Down Jones dropped over 500 points in a single day, which would have seen billions of dollars disappear in a matter of hours from the value of companies. That in turn has helped to drive down the New Zealand dollar, which is currently sitting at U.S.$0.65c. Since this is unlikely to improve in the immediate future, I expect the N.Z.$ to drop further, which will be useful for exporters.
Around Brexit it is hard to know who really means what. I think it can be safely said though, that British Prime Minister Boris Johnson is determined to leave, deal or no deal – how serious will he be about a quick trade agreement with New Zealand after a hard landing when much more pressing problems such as regaining E.U. access will remain? Will a British exit from the E.U. have implications for how we trade with the larger E.U.?
There is always the risk in the Middle East that a tit-for-tat action between Iran and the United States or other countries with shipping in the Persian Gulf might suddenly turn into something more serious. If Iran attempted to close the Straits of Hormuz, how long could it maintain that stance before some sort of international intervention, either through military means, the use of political and economic weapons such as sanctions?
Brexit or no Brexit, the rate of economic growth in Europe over the last few years have seen Greece have issues with whether or not it wants to drop the Euro. Several years later, whilst Greece’s economy seems to be showing signs of economic recovery, it has significant work to do in diversifying its output. How much has the Union learnt from the darker days when watching to see which radical would emerge victorious and full of promises to shake up the establishment? Is the establishment too established?
Looking at the problems confronting the world economy, I think it could be argued New Zealand is in relatively good condition. Low Crown debt, sluggish growth even if National and A.C.T. want us to believe economic armageddon is coming, it is much better than Venezuela where the economy has all but collapsed.